Tuesday, March 18, 2008

Bear's Permanent Hibernation

Lots of emails asking for my take on Bear Stearns. As I mentioned a few days ago, I'm working on a longer piece about this, so instead of cannibalizing from it I'd rather link to it when it's done. For now, a few points. First, this was not a "bailout," at least in the narrowest (and I think most widely understood) definition of the word; Bear barely lasted a full trading day after news of the Fed's involvement. Essentially it was an intervention, and arguably a partial bailout of JP Morgan. On the continuum of expediency, it's somewhere between Long Term Capital and the RTC. Second, I see this as worthy more of indignation than outrage. That's because for anyone paying attention during the past decade or so to the evolution of monetary policy and broader trends like the socialization of risk, this should have been no surprise. Third, the implications for the future are far more troubling than this single episode. Because the government just deemed Bear, a medium-size player and non-commercial bank, as worthy of a public backstop to the tune of tens of billions, what do you think will happen if a Citi or Washington Mutual -- not too mention a Fannie -- finds itself in the same position? Fourth, in the debate about bailouts, Fed mandates etc., don't lose sight of the fundamental story: a small coterie of unelected and in many ways unaccountable statists just reached into the public till to facilitate a transaction between private parties who've made an extraordinary amount of money during the past few years (more on that soon from a personal perspective; I think many non-industry readers will be stunned). Finally, and along those lines, this reader's post on Barry Ritholtz's blog caught my eye:

Today's Fed actions led me to further think about the current state of our economic system. I have gone over in my mind numerous time about one fundamental question. Under what kind of system are we living? Is it Capitalism, Totalitarianism, Fascism, Communism or Socialism? Today's action provides the most direct evidence that our system has devolved back to FINANCIAL FEUDALISM, or FEDALISM as it could be more aptly called today. This remarkable act of bailing out one investment bank so that their derivatives wouldn't have to be marked to market proves the oligarchical nature of our society. The Lords of Wall Street are under the protectarate of the FEDal system. We the fifes must go about our daily lives and hand over increasingly large sums of our hard earned "money" to ensure the "stability of the markets". What bonus should Mr. Schwartz receive from the taxpayers largesse? As the new Sheriff of Nottingham, Ben Bernanke, and his sidekick, Hank Paulson, go about their daily adventures in destruction of our savings by debasing our currency, we the fifes can only look upon these actions with disbelief. This is a supposed to be a democracy, yet all these decision take place behind closed door under dubious circumstances and have unknown future consequences. This has gone far enough. We should demand the immediate resignation of Ben Bernanke and Hank Paulson, and start having some transparency in our markets. These ridiculous anti-Capitalism, anti-competitive, anti-free market, Save our Crony friends at any cost policies MUST STOP! Robin Hood, where are you?

As gold and oil have soared, I get occasional emails from happy readers asking for my opinion on the next big investment theme. If restive (but strangely encouraging) posts like that are any indication, pitchfork futures might be the way to go.

11 Comments:

TCR says:> "I see this as worthy more of indignation than outrage. That's because for anyone paying attention during the past decade or so to the evolution of monetary policy and broader trends like the socialization of risk, this should have been no surprise."

It should go without saying -- but the problem is, it almost never does -- that the broader trends like the socialization of risk, are worthy of outrage instead of indignation.

I echo the sentiments of the guys over at itulip.com: "We like Capitalism. Don't break it." They have a rather populist flavor on their site, but not because they hate or envy the people who make a lot of money -- quite the opposite, many of their contributors are investment professionals. They go on to explain that gross corruption, selective enforcement, and favoritism such as this, inevitably and rightfully destroys the trust of the proles in the entire financial system. And when that trust is gone, the proles tend to overthrow the entire system, by one route or another -- often with pitchforks. Then _nobody_ makes any money.

I spend a lot of time in Mexico. Anyone from the Wall Street/K-Street Axis who really thinks that currencies can be propped up on thin air, that the government should pick and choose which companies and financial institutions get largesse, that environmental and financial regulations are only an obstacle to making money -- anyone like that should feel free to move here and sample the quality of life here. Those are the conditions that obtain in Mexico, and that's exactly where the U.S. is headed.

I'm afraid that the people who you're talking about would go to Mexico and wonder what you're talking about. Sure, there are a lot of poor people, but you can ignore them......

They don't think there is any problem with gutting the rest of the economy for their own personal benefit. After all, they "deserve" what they've earned -- they were "risk takers" and "innovators" and they weren't selling their CDOs to widows and orphans -- screw the chumps who bought that stuff.

They totally believe that environmental and financial regulations are only an obstacle to making money. Somehow they managed to convince a big chunk of the country that they were right for the last 28 years or so.

But the CATO Institute told us the Bush tax cuts would lead to permanent, uninterrupted wealth! They even used the period of 1920-29 as the model.

Honestly, the Fed liquidity is so efficiently priced into markets these days we see rate cuts and record prices for commodities concurrently on the same webpage. Fully expecting the DJIA to drop 4-8% yesterday and watching the trendlines confirms our doubts: the helicopters were warm and ready to fly at the start of trading.

So what was the invisible imposed 'tax' (inflation) levied yesterday? Following the socialized risk argument, what's the future value of this levy?

Pay now: pay later. This is economic 'policy'?

The photographs from the Economic Club of New York meeting last week were telling. The governors looked deeply concerned, at times shocked. For Bush, the gig is up. This administration is thoroughly incompetent, on top of the corruption: Cheney's complicit and a bad substitute.

It's time for the grownups to pull the plug on this show and bring in an interim government under Pelosi, if for no other reason so the nation can steady its course through the rough waters ahead.

Tough medicine. Let's put some real talent back into the Executive office.

Yeah, I think you're right, Whammer. The fact that the elites don't really care what happens to the larger economy, much less the proles and their little family budgets -- that's also something the U.S. has in common with Mexico.

The only difference is that Mexican elites don't even bother to try and disguise the situation with weasel words like "I'm a Capitalistic innovator, a risk taker"... Mexicans are very up-front about their class system, generally, and the richer ones say "I earned it because I come from a rich family" or "I run a large company". Not that an individual rich Mexican feels he doesn't have to work, but he knows and admits that opportunities to get ahead fall mostly to the already-rich. Meanwhile the lower-class Mexicans toil long, long hours at menial labor and can barely feed their families. In some ways the honesty is quite refreshing.

Every time I hear that America is a meritocracy, a classless society, I get nauseous. The dude with his hand on the nation's tiller right now, as well as his whole Administration, are the most irrefutable counter-example of a meritocracy imaginable and everyone's been ignoring that fact for eight years plus.

I totally agree with your characterization of the dude with his hand on the tiller right now.

And I am truly dismayed by this stuff, because I am a graduate of the same "well known Eastern business school" as the current dude, and the entire menagerie of him, Skilling, and a whole lot of hedge fund managers and VCs and other near-criminals discourages me about our collective ability to understand what is going on right in front of us.

For whatever reason, the VCs and IBankers who reaped spectacular wealth from gaming the tech bubble have escaped any kind of scrutiny or opprobium for their behavior. So, if you're looking at those people and thinking "those guys are worth close to 9 digits at a minimum, I need to get me some of that", why are you going to play fair?

Now, all of that being said, I still think that the US is closer to a meritocracy than most places. But we need to defend that and not let it slip away. That is one reason why I like Obama -- here's a guy from a single-parent household, smart as hell, courageous, and who really believes in the "vision" for this country. He's by no means perfect (who is?), but I think we need to get back to the real ideals that I think we have for this country.

And, all the mofos who don't like it can move to Mexico or Paraguay or wherever! ;-)

FINANCIAL FEUDALISMoh...I like that. I have made this point many times on this blog and it is why I have been so bearish. We do not have anything resembling a free market economy and haven't for some time. It is a cultural problem. Our ivy league educated political and financial leaders have allowed hubris to consume them. They convinced themselves that we truly were "the indispensable nation". Wow what a crock of...the rest of the world is bigging to gag on our smell.